The Disadvantages Of Using Excess Credit Card Finance Essay

Introduction

Nowadays, the system of world’s economy has developed. People have better knowledge about how to manage their personal finance than in the past. Therefore more and more people use money from the future or called “credit”. The consequence is that the credit card has becomes a general part in the daily life of people. Because of more convenience and easy portability, credit cards are popular as a financial intermediary. Especially when banks and other credit card issuing institutions attract customers with promotions and various privileges, the number of credit cards are more extend. Currently, the unpaid debts are higher, and the monitoring behaviors of asking for debt’s payment are so seriously which can be negative effect in credit card businesses rather than the consumer credit cards seem. Despite the credit cards are the type of financial products that allows consumers to access financial services directly and the system will be used as a tool in financial management perfectly. Accordingly, some customers believe that credit cards are just the plastic cards come with the high debt burden for people who use them, while other customers decide to use credit cards and take the benefit from them because they receive more comfortable and easier to manage their finance. Owing to used credit cards have both advantage and disadvantage effect therefore people should use credit cards wisely. This essay will first explain why people should have credit card. Secondly, the essay will describe the disadvantages of using excess credit card. In the final part, this essay will demonstrate the credit card spending for first half of 2010 in Thailand and The United Kingdom ,and then the comparable credit card spending for second half of 2010 between Thailand and The United Kingdom will be considered.

Definition

The English term of credit mean loan which refer to the money that borrow from financial institute. For Latin language, Credit is called Credo which means I believe (Sithep, 2008). This word is used in economic as the exchange between goods or service and the promises to pay the money back immediately or in the future. To illustrate, when sellers believe that shoppers will be able to pay in the future, the shoppers will be permit to remove the product first and then pay back later. In addition, The Definition of credit in Finance can be defined as “a legal contract where one party receives resource or wealth from another party and promises to repay him on a future date along with interest” (Ingham, 2004). In simple terms, a credit refers to the terms and conditions deal with a delayed payment agreement of goods bought or loan. With the issuance of a credit, a debt is formed. In the trade and commerce areas, “credit is defined as the sanctioning of detained payments for products that have been bought” (Steven, 2003). Accordingly, the definition of credit can be defined by several economists and finance professionals in many ways. Additionally, credit card is defined by Pollick as “the plastic credit card with a magnetic strip” (Pollick, 2010). The definition of credit card refer to any card, document or other object that issued the card to the cardholder for using to pay the price of goods or service and also include permit cash in advance up to the credit limit which is the maximum amount of money that creditor will allow them to borrow and the credit card holder will have time before they have to repay later. If they do not pay in full amount, the credit card issuer can legally charge interest fees on the unpaid portion.

Why people should have credit card.

In the past, when customers want to buy something, they will save the money before buying. Nowadays, the method to obtain the credit card is simpler. Therefore credit card holders will use the desired money before they have it, by borrowing the money from issuers, and then will have much time to accumulate money for paying back later. So the credit card has several benefits for those who know how to use it. For example, if the card holder purchase the brand name bag which is worth more than 8 thousand pounds, he will not have to carry a lot of money with him but just pay immediately by credit card. The goods or service will be sent to the spender, after that the borrower will have approximately 30-55 days, depending on the policy of bank cards, to pay the debt back, moreover, the debtor does not need to repay in full because he can choose to repay the only lowest rate of the cost that credit card issuer offers(Consumer Protection Foundation, 2008). In an emergency situation, where the card owner needs to use cash right away, the credit card offers some cash in advance. To clarify this, the card holder can withdraw cash from any cash point when he wants. At the due date, the credit card issuing institutions will sent the credit card slip of the monthly expenditure account so this can confirm the correct payment every month. At present, credit card issuers are also having various promotions to attract consumers. For instance, most credit cards offer discount promotions such as a discount of 5% for medical expenses, 10% for tuition fees and restaurants, 1-3% for petrol stations, 0% of interest rate for the installment of electronic equipments and on top 5 % more for a luxury credit card(Consumer Protection Foundation, 2008). Another promotion is to collect points for every credit card use, then the user can exchange points for a prize such as air fare, kettle or gift voucher. When the credit card owners travel overseas, it will be comfortable because travellers do not have to exchange money into the foreign currency. These are all advantages of using a credit card and the reason why people ought to use credit cards. However, using credit cards can be the cause of financial problems if people do not use them wisely.

Use credit card carefully

The disadvantages of using credit cards are not caused by the card but are affected by people is use of them. According to Ramsey (2009), the statistics of credit card spending are 18% more than cash spending (Ramsey, 2009). For the reason that credit cards persuade people to spend money which they do not have it yet. When the credit card holder buys something by using credit card, the debt will not require to immediately pay back but it will take long time before the debtor have to pay back. This may seem as “free money” at that moment but actually the debtor have to repay later. Consequently, at the end of each month if the borrowers do not repay all amount of debt, their liabilities will significant increase because the credit card companies will charge a vast amount of interest on each balance (Turner, 2007). To illustrate, when customers deposit the money £100 for saving, most banks will provide the annual interest at the 1.0 to 2.5% which depend on other factor such as the oil price, the inflation rate, and government. However, if debtors use credit from the banks about £100 and they have no money to pay back, most creditors will be charge them up to 10 times of the amount of interest on balance which is 10-25% interest (10 times of 1.0-2.5%) that means at the end of year the debtor will have more liabilities. Besides, sometime thief may steal the credit card number and create more debts by using the card but if card holders can remember and report their stole credit card number to their credit card company immediately, they will not be charged for any purchases that the stealer has made. Hence the credit card holders should not loan your credit card to anyone and at the end of each month always check the statement closely to make sure all charges are correctly. These are several things that the credit card holder can do to prevent credit card fraud. Basically Ramsey (2009) estimated that if people can manage their money by operating on a written budget and having a plan before go shopping, they probably only overspend by about 10% though they will use cash or credit card.

The credit card spending for first half of 2010 in Thailand

For the Thai’s credit card spending, owing to the recovery of Thai economy in the first half of 2010, credit card business has more improved and the credit card issuers create more credit card promotions which have an effect on the growth amount of credit card in the first three months of the year ( Thai Farmers Research Center, 2010). However, for the period of April and May when the violent political situations happened, credit card companies were affected. According to Leading Thai newspaper (2010) reported that in April, the growth of spending on credit cards diminishes about 11.7 percent compared with the same month of last year which has the similar political events(Leading Thai newspaper,2010). Nevertheless, after the political turmoil has ended, the Thai government try to bring consumer confidence back quickly by accelerate setting up the policy to support businesses which had both direct and indirect effect from this political crisis. Hence, not only does economic activity after political chaos have improved, but the policy also has positive effect on credit card business in the rest of the year. As a result of FIFA World Cup 2010, the using credit cards are dramatically increased because football is a popular sport in Thailand so it motivates people to use credit card more (Thai Farmers Research Center, 2010). At that time credit card entrepreneurs create credit card marketing activities by intensely stimulate people’s spending with partner stores and department stores. The overall amount of spending on credit cards during the first half of 2010 ,which is excluding the cost of foreign countries, credit card abroad, and cash advances, are approximately growing 14.9 percent compared with the same period of last year (Thai Farmers Research Center, 2010).

The number of credit card spending by English people in the first semi-annual

In the United Kingdom, the recession of economy have a strong effect on credit card companies. The new credit card regulations have declared by the government. As a result of these new rules, the credit card companies have an impact on profitability and increase costs of issuer (UK Cards Association, 2010). Hence they have to reduce policy sales by cutting down the number of new offering cards. Although there is the small amount of credit card competitions, only a few customers can successfully apply the credit cards. Subsequently credit card businesses have to adapt themselves to cope with the demand in credit card market. In the current economic situation, these businesses return to have high competition again. The new credit card promotions are created to attract both new and existent customers by credit card providers. For instance, some credit cards offer no interest for 16 months to repay existing debt (Slade, 2010). A study by Slade, spokesperson for Moneyfacts.co.uk, (2010) indicates that “In the last year the number of cards charging no interest on new purchases for at least 10 months has increased by 450%”(Slade, 2010). Nonetheless, the average of interest rate on credit cards is approximately 18.7% which has edged higher, while that for personal loans has decreased over the last two years. This reflects credit card issuers' fears over rising defaults. According to data from the UK Cards Association (2010), the value of UK purchase made on credit cards has increased just only 2% compare with the same period of last year.

Comparison the trend of using credit card in second half of 2010 between Thailand and The United Kingdom

For the trend of credit card spending in the second half of 2010, both Thai and UK credit card market will have high competitive, moreover, in the last quarter of the year which is the shopping season and tourism and festivals will be an important period for credit card issuers to increase credit card spending by using marketing strategies to attract customers. According to Thai Farmers Research Center (2010) forecasts that the trend of the whole using credit card for Thai people in the second half of 2010 will expected increase to be approximately 15.0 percent to 17.5 percent from 5.9 percent in 2009 (Thai Farmers Research Center, 2010). Although Thailand's economic position in the future will be better, entrepreneur is still aware of risk factors that may occur in the next period. For example, domestic political factors remain uncertain and external factor is the slowing down of world economic recovery. When the interest rate is increased, the purchasing power of consumer will decrease. The consequence is that the behavior of some credit card holders will change to be less using credit cards.

In contrast, due to the UK spending behavior prefers to use debit cards more than credit cards so the debit card market in UK is growing very fast. In addition, the government declared the new rules for reducing the amount of credit cards and the credit card issuers also increase interest rate for unpaid debt. Consequently, the UK spending on credit cards will continue to be lowered over the next five years, moreover, between 2010 and 2015 the expected growth of spending credit cards are also inert growing.

In conclusion, in the second half of 2010, the amount of credit card spending in Thailand will significant increase whereas UK people will expense a reduced amount of credit card spending.